They are known for their low fees, but, how do online estate agents make money?
Everyone wants to save money when selling their home and online estate agents appear to offer a good opportunity to do that.
However, if that comes with the added compromise of a lesser service, is it worthwhile?
We attempt to answer the question ‘how do online estate agents make money?’ so that you can make an informed decision if the opportunity to save money is worth taking…
Most online estate agents offer their services for a lower upfront payment. Typically this will be less than £1,000 regardless of the value of your home.
Some see this as such a low price that it’s impossible for the agent to provide as good a service as a high street agent who typically charges several thousands of pounds.
However, since high street agents operate mostly on a commission basis and only get paid when a property sells, they need to charge more to cover all the time they’ll spend marketing properties that don’t sell.
In other words, online agents can charge low upfront fees because the homeowner isn’t subsidising all of the people who list their properties but don’t find a buyer.
Economies Of Scale
Their pricing model isn’t the only reason online estate agents can get away with charging less.
Because they usually operate nationwide, they can benefit from more economies of scale than a smaller, local agent.
That gives them savings that can be passed on to the customer, thereby allowing the agent to make more money, despite charging less.
Online estate agents tend to only have one head office and forgo the need for small branches on local high streets.
They achieve this by employing local experts who value homes and take photographs, etc in one specific area. They do not need to be office based since most of their work is carried out travelling to and from customers homes.
The support, marketing, offer negotiation and sales progression teams are then located within the main office.
Since an online estate agent will usually only have one office to run, they benefit from much lower overheads. This allows them to make money even on low fees.
Charging For Extras
One of the ways online estate agents make money is by charging for some extras that you might normally expect a traditional estate agent to include as part of their package.
For instance, most online agents will expect you to conduct your own house viewings. This isn’t necessarily a bad thing as you may find you’re better at selling your home to prospective buyers than qualified estate agents!
If you don’t want to do viewings yourself, you would have to add on a hosted viewings package (if available) which typically costs another £300-£360.
Other extras can include upgrades to your property listing, EPC’s, and sales accelerator packages.
Each extra you take earns the online estate agent more money and makes it easier for them to sustain their low fees.
Recommending Additional Services
All types of estate agents usually have a number of extra services they can recommend in order to boost their earnings.
For example, you’ll often be asked if you have spoken to a mortgage advisor or if you need to find a conveyancer.
This is because both online estate agents and high street ones have relationships with providers of such services and receive a kickback for each new client they refer to the other business.
This allows them to bump up their earnings and increase their profit margins.
Online Estate Agents Using Rightmove
Other than the typical running costs such as staff wages and office rental and utility charges, one of the other major costs for online estate agents is advertising properties.
Since virtually all online estate agents are now using Rightmove and the other portals, this contributes a significant amount to their overheads.
Although each portal is different, estate agents will usually be paying anywhere from £500 to £2,000 a month to be able to list properties on a portal.
When you consider the number of properties an agent is listing every month, you realise they don’t actually need to sell many to cover the costs of listing all of their properties.
And that is one of the main reasons why online estate agents can charge less, particularly when charging an upfront fee.
Online Estate Agents Vs High Street
We have touched already on some of the differences between online estate agents Vs high street estate agents when it comes to how they make money.
High street estate agents operate with high costs due to the fact they often have multiple offices to run in prominent locations. They also usually have a narrow scope of the area they can find new customers in.
Add to that the fact they rely almost exclusively on commission-based fees and only earn money when properties are sold and you can see why high street estate agents are so expensive.
Online estate agents, on the other hand, have few offices to run, can accept new customers all over the country, and often use a mixture of upfront pricing and commission-based pricing.
This gives them better cash flow, more profit margin, and ultimately more savings they can pass on to the customer in order to remain competitive.
Online Estate Agents No Sale, No Fee
As we briefly mentioned, not all online estate agents rely exclusively on upfront pricing in order to make money. Many also offer a pay only on completion option.
The number of online estate agents with no sale, no fee has grown significantly over the past year or so. In fact, there are now even online agents that work ONLY on a no sale, no fee basis.
The advantage to the homeowner is that it puts all of the risk on to the agent. If the property doesn’t sell, the homeowner doesn’t pay anything. This also means the estate agent is more motivated to sell your home as its the only way they’ll earn money.
The downside to the homeowner is that the fee will usually be more than if they had paid upfront. That’s because, like with high street agents, you’ll be subsidising the marketing of the properties that haven’t been successfully sold.
There’s no right or wrong answer as to whether upfront fees or payment on completion is the better option.
It depends entirely on your attitude to risk, the likelihood of you finding a buyer for your property, and how important getting the cheapest possible price is to you.
Disadvantages Of Online Estate Agents
We have spoken a lot about the advantages of online estate agents and how they can charge less because it’s easier for them to make money.
The truth is that online estate agents have improved immensely over the last few years and now offer a comparable service to a high street agent but at a much lower cost.
You can see the best online estate agents that we recommend on our comparison page.
However, there are also a few disadvantages of online estate agents that you should be aware of.
Firstly, as there is no local office, you can’t just pop in and speak to someone face to face. Instead, you’ll be dealing with people over phone or email for most of the process.
Because online agents cover a larger area, their local knowledge may not be quite up to the same standards as a high street agent.
You’ll also need to look out for hidden fees as a few online agents charge extra if you choose not to use their conveyancing service.
Despite all those negatives, online estate agents remain one of the best ways to sell your home. You can check out our online estate agent reviews to find the one most suited to your needs.